China should buy U.S. stocks instead of Treasuries as they may be safer investments amid concerns about a U.S. debt default or credit-rating downgrades, according to Andy Xie, an independent economist.
“The U.S. stock market can be a credible alternative,” Xie, 50, formerly Morgan Stanley’s chief Asia economist in Hong Kong, said in an interview in Bloomberg’s Shanghai office yesterday. “U.S. companies are reporting strong earnings and they are selling a lot to emerging markets. Even though U.S. stocks aren’t cheap by historical standards, they are a better investment relative to Treasuries.”
Standard & Poor’s 500 Index companies are beating analysts’ earnings estimates for a 10th straight quarter, and the group surpassed its annual per-share profit record of $84.66 from 2007 last year. Analysts see 17 percent income growth in 2011, according to the average estimate in a Bloomberg survey.
The prospect of a U.S. default could spur fund inflows into emerging markets, fueling inflation in countries ranging from China to India, Xie said. The economist said in October 2010 that China would face a “big battle” to contain inflation, which jumped to a three-year high last month. He also accurately predicted in April 2007 that China’s equities would tumble.
Loss of Confidence
China is the biggest foreign investor in Treasuries, as holdings reached a record $1.149 trillion in April, a Treasury Department report said in June. Former Chinese central bank adviser Yu Yongding said July 27 that China should reduce its Treasury holdings amid an impasse among policy makers on raising the U.S. government’s debt limit.
China’s appetite for Treasuries will wane as the country loses confidence in America’s government, Stephen Roach, non- executive chairman of Morgan Stanley Asia Ltd., said yesterday in an e-mailed note. Treasuries rose yesterday, pushing 10-year yields to a one-week low, on concern the debt deadlock will damage the economy.
U.S. House Speaker John Boehner, falling short of the votes within his own party needed to increase the debt limit after a night of one-on-one appeals to members, canceled a vote on a plan that Senate leaders pledge to defeat.
President Barack Obama’s administration and Democrats and Republicans in Congress are locked in a stalemate over the type of deficit-cutting measures that should be tied to an increase in the nation’s $14.3 trillion debt ceiling. The Treasury Department has said the U.S. exhausts its borrowing authority on Aug. 2 and risks going into default. S&P, Moody’s Investors Service and Fitch Ratings have said they may downgrade the U.S.’s top AAA rating if lawmakers fail to reach agreement.
A newspaper published by China’s central bank ran a question-and-answer article on the debt stand-off today that said U.S. bonds are the world’s most stable and least risky and only America’s debt market could absorb China’s investment of foreign-exchange reserves.
The biggest impact on China from a default would be through a global recession, rather than the losses on its currency holdings, which would be “serious,” Jin Minmin and Liu Lina, reporters at the Xinhua News Agency wrote. The article, reprinted in the central bank’s Financial News, also said that most analysts see the U.S. as unlikely to default.
“Some have been talking about cutting investment in U.S. debt for years. But the question is what else is safer? Europe is in trouble,” said Yang Delong, a Shenzhen-based fund manager at China Southern Fund Management Co. which oversees $21 billion. “China does need a variety of investments but safety should be the priority in any government move.”
U.S. Treasuries are a safe investment, Lawrence Lau, head of the Hong Kong-based unit of China Investment Corp., which runs the nation’s $300 billion sovereign wealth fund, said at a forum in Beijing on May 12. Equities rose by 12 percentage points last year to 48 percent of its global portfolio as of Dec. 31, CIC said in its annual report released on July 26.
“U.S. bonds are not safe, but people think they are safe,” Yu, a researcher at a Beijing institute under the Chinese Academy of Social Sciences, told reporters in Mumbai this week. “That is a mirage.”
Concern the U.S. credit rating will be cut has dragged the benchmark S&P 500 Index (SPX) down 3.3 percent since July 22, the day Boehner, a Republican, walked out of negotiations with Obama. The index has advanced 3.4 percent this year on speculation earnings growth will hold up even as the world’s biggest economy slows.
Singapore, whose economy grew faster than China’s last year, could be one of the biggest beneficiaries as money flows out of Treasuries, according to Bank Julius Baer & Co. and Schroders Plc.
Funds that can only invest in assets with the highest credit rating would reallocate to countries that have that ranking such as Singapore, said Mark Matthews, Singapore-based head of research for Asia at Bank Julius Baer, which manages about $205 billion in client assets. Singapore is rated AAA by Moody’s and Fitch.
“Whether U.S. shares are necessarily better than U.S. debt -- maybe,” said Lee King Fuei, a Singapore-based fund manager at Schroders, which oversaw $323 billion as of March 31. “If U.S. debt and the dollar is what you are worried about, you should consider the Singapore currency and stocks. Generally, Asian stocks are probably looking much better.”
Xie favors U.S. energy and agriculture companies because of rising demand for commodities from emerging markets, he said, without naming any stocks. Since leaving Morgan Stanley, the former World Bank economist has worked as a fund adviser and written opinion articles for Caixin Media Co., a Chinese financial news company, and Bloomberg News.
“China should buy U.S. stocks,” Xie said. “Stocks are better than bonds.”
--Allen Wan in Shanghai, Weiyi Lim in Singapore. With assistance from Irene Shen, Zhang Shidong, Victoria Ruan and Paul Panckhurst. Editors: Darren Boey, Nick Baker.
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